FHFA's Fake $100 Billion Number

The critical point made in the Democratic Congressmen's letter to FHFA is this:  Director DeMarco's widely reported claim that principal write-downs on Fannie and Freddie mortgages will cost taxpayers $100 billion is simply false.  There are two reasons the statement is a complete misrepresentation.  First, the $100 billion is simply the aggregate amount of underwater mortgage principal on all Fannie and Freddie loans, not just those at risk of foreclosure or where borrowers are seeking modifications.  Second, Fannie and Freddie will lose more than $100 billion on underwater loans in foreclosure sales, according to their own projections, if the loans aren't given principal write-downs.

The relevant comparison is between the foreclosure losses on underwater and defaulted mortgages, on the one hand, and the net payouts from modified mortgages with principal reduction on the other hand; in other words, the dollar difference between doing the write-downs and not doing them.  FHFA's own analysis shows that changing from the current policy--to postpone but not eliminate excess mortgage principal--to a policy of writing down that excess principal, would yield a positive net present value of $28 billion.  This is because fewer homes would end up in foreclosure sales, where losses exceed 50% of principal, and more homeowners could pay their (reduced) debt.

The Permanent Foreclosure Crisis and Obama's Refinancing Obsession

For the umpteenth time, President Obama has announced that his solution to the foreclosure crisis is to encourage "responsible" homeowners to refinance at lower interest rates.  Adopting the Tea Party rhetoric and blaming home buyers who got houses in 2006 for their inability to foresee what few economists foresaw, Obama has steadfastly refused to push for principal reductions and payment suspensions for homeowners behind in payments, lest their luckier neighbors who bought at lower prices become resentful.  As a result, he continues to offer help to homeowners who need it least.

Behind the rhetoric is an important policy choice: who will bear the billions of mortgage losses that have yet to be flushed out of the system.  Principal reduction modifications for defaulted borrowers would distribute the losses among taxpayers (via Fannie and Freddie), private investors and banks (who hold non-GSE loans), and give underwater homeowners some relief.  More importantly, principal modifications mitigate the aggregate losses to the system while accelerating the necessary deleveraging. Refinancing current borrowers does nothing to prevent the huge deadweight losses from continuing foreclosures, at 50% loss severities, on homes whose owners are delinquent.  Choosing to do no more for the 7 million or so delinquent mortgage debtors means maximizing losses to those homeowners, but also to taxpayers and investors.  It would certainly help to continue driving down home prices, which does benefit new first-time buyers, but at a huge aggregate cost. 

In fact, as conservator of the nationalized Fannie Mae and Freddie Mac, the federal government could make the needed modifications of delinquent mortgages happen with a stroke of the pen, more or less. Instead, the Administration proposes the dubious strategy of loading up the FHA portfolio with 4% mortgages at 125% loan-to-value ratios, thus continuing the process of transferring future mortgage losses from banks to taxpayers, and amplifying those losses, while letting the foreclosure crisis continue, just as Mitt Romney proposes.  Nothing about the refinancing strategy moves forward the process of realigning mortgage debt to home values.  Instead, the strategy relies on the doubtful proposition that home values will soon return to rising at their pre-2007 clip.

Pacta sunt servanda and the housing market and broader economy be damned. 

Justice Calls for Foreclosure Mediation Support

The Justice Department's project on access to justice has issued a report summarizing current research on state foreclosure mediation programs, calling for more funding and support.  The report offers an excellent summary of the best available research on foreclosure mediation programs, including the very successful Philadelphia and Connecticut programs, that have participation rates as high as 60% to 70% of defendants, and whose participants achieve settlements keeping them in their home in as much as half of the cases. 

The industry, led by federal bank regulator OCC and housing finance regulator FHFA, is promoting the idea that all foreclosures are hopeless, homeowners are using state law solely for the purpose of delay, and that massive foreclosures are inevitable, that most judicial foreclosures just result in default judgments, so let's get on with it.  The empirical evidence from states where adequate resources are applied, and mortgage companies are compelled to evaluate each and every homeowner with an income and a desire to pay, belies this myth. 

Justice now joins the Federal Reserve in advocating for fewer, not more, foreclosures.

Anna Nicole Smith, the Constitution, and Bankruptcy

To all law profs out there who plan to attend next week's Association of American Law Schools annual meeting, be sure not to miss the Creditors' and Debtors' Rights section program Saturday morning at 8:30.   The theme of the program:  "Marathon at 30:  A Retrospective on Bankruptcy Court Jurisdiction in the Shadow of Article III."  Bankruptcy Judge J. Rich Leonard will moderate a discussion featuring Douglas Baird, Susan Block-Lieb and Troy McKenzie.  The panelists will consider, among other issues, the confusion sown by the Supreme Court in the process of resolving claims to the estate of Anna Nicole Smith's billionaire husband in Stern v. Marshall.  For some background on the case, see CS posts here, here and here. 

Laboratories of Democracy and the Commissioners of Uniformity

States have passed a variety of changes to foreclosure laws and court rules in response to the foreclosure crisis, including new notice and mediation requirements to stimulate workouts between lenders and borrowers.  Some of these laws have been found effective in reducing foreclosures.  Subprime mortgages with delinquent payments are much more likely to end in foreclosure sales in nonjudicial foreclosures states, while states with both judicial foreclosure and strong consumer protections, like New York and Pennsylvania, have modification rates well above the national average (Download Delinquent Subprime Loan Outcomes by State Excel table.)

On the other hand, nonjudicial foreclosure is faster and cheaper, which can be an advantage when dealing with abandoned properties.   States also vary considerably in the amount of time homeowners have to cure a default before foreclosure, or redeem a property after foreclosure.

The Uniform Law Commission, who bring you the Uniform Commercial Code and other model state laws, is launching a project to consider drafting a uniform foreclosure law for the 50 states.  The study group consists of professors, judges, and lawyers, but notably absent is any member who could be regarded as a consumer or homeowner advocate or even sympathizer.  Interested parties may request to participate as observers, and I am told that observers have had some influence on these uniform law projects in the past.  Of course, whatever the ULC drafts does not become law until a state legislature chooses to adopt it.

In the case of foreclosure notices, ADR, redemption, and the judicial/nonjudicial debate, my own view is that uniformity among states is neither likely nor especially desirable. Nevertheless, this ULC project bears watching.

 

 

Occupiers Target Foreclosures

Occupy Wall Street have announced a national day of action around mortgage foreclosures and evictions, to be held on Tuesday December 6.  My comments on the protest and the current state of the foreclosure crisis at salon.com are here.

Get your Independent Foreclosure Review!

OCC and the Federal Reserve announced this week that banks who service mortgages will be sending letters to homeowners this month and next, offering them an opportunity to request review of any 2009 or 2010 foreclosure.  Every homeowner who asks gets a full independent review by a foreclosure auditor.  A homeowner who was in any stage of foreclosure in 2009 or 2010 is eligible for review and possible compensation.  The request for review runs to five pages, and the web site is not exactly user-friendly.  There is also a toll-free number to apply:  888-952-9105.

Compensation will be paid (in the amount determined by the independent reviewers discussed on this blog previously) for financial injuries resuting from errors, misrepresentations or deficiencies in the foreclosure process.  Examples include foreclosures during bankruptcy or against an active-duty service member, improper legal or other fees, or foreclosure while a homeowner is in trial or permanent modification plan.  The deadline to request a review is April 30, 2012.  A request for review will not stop foreclosure, and redress payments will not require borrowers to release claims or affect any pending foreclosure litigation or bankruptcy proceeding.  The foreclosure reviews are being done by consulting firms, such as Price Waterhouse and Promontory.

However weak or unreliable this process may be, homeowners have nothing (other than some time) to lose by applying for a review.  Borrowers in foreclosure litigation or bankruptcy might also want to seek discovery of their audit/review files to see what deficiencies were identified (or missed).

Occupiers on Bank Law: Fix It

If the Occupy Wall Street protests stand for anything they stand for a popular demand to rein in the banks and to bail out the victims of bank excesses.  Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do. 

Dodd-Frank fell short.  It consisted of a series of half-measures and punts to various agencies.  Break up banks that are too big to fail?  Dodd-Frank instructed the FSOC to think about it but not too much, and so far FSOC has followed its mandate.  Limit executive compensation? Instead we got shareholder say on pay.  Separate utility functions of banks from casino gambling?  In lieu of restoring Glass-Steagall, the watered-down Volcker Rule. Require banks to prevent every preventable foreclosure? Hasn't happened. Make them offer transparent and competitive retail credit and savings products?  Still waiting on a CFPB director appointment before we can work on that item.

Banks don’t make anything; they either provide payment and intermediation services, or they engage in various forms of gambling with other people’s money.  The first two functions used to be thought of as low-profit utility services (3-6-3), and were separated by Glass-Steagall and its weaker cousin Section 23A of the Federal Reserve Act  from gambling and speculation. 

Banks make, sell and rent money.  Our fiat currency (decoupled from gold by Republican President Richard Nixon), consists of IOUs from banks, which in turn depend entirely on the faith of people and businesses in those IOUs, and on the willingness of the United States taxpayers to back them up.  In other words, banks trade on government backing; it is their essential product.  The days are long gone when any sensible person would accept a purely private bank note as money.  For this reason, banking is fundamentally different from industries that make things and sell them.  We need to vigorously reassert this principle, and end the charade that regulation of banking is some sort of unwarranted intrusion into a free market enterprise.  We need to get serious again about real banking regulation.

Foreclosure Crisis in Europe vs US

While European markets have seen increases in mortgage foreclosures, more robust regulatory intervention seems to have kept defaults and foreclosures to much lower levels than we are experiencing in the United States.  At the peak of the crisis a year ago, about 9% of US mortgages were in serious default (90 days or more past due or in foreclosure.)  The United Kingdom and Spain had default rates of less than 3%, which they still regard as a crisis.  The only EU country with mortgage defaults exceeding US levels is Latvia.  Detailed information on European foreclosure rates and prevention measures are available at the EU web site on the new mortgage credit legislation.  The report containing the table on the right is available here.

 European banks argue that the lower default rates are a result of less reckless lending prior to the crisis, compared to the US subprime market, and that may be true.  It is also clear from the EU Commission summaries that most European countries have actively required or strongly encouraged lenders to work out as many troubled mortgage loans as possible, and have introduced delays and procedural hurdles in the foreclosure process to further stimulate workouts. 

The UK launched two subsidy programs at about the same time that the US Administration launched HAMP in 2009.  The Homeowner Mortgage Support allowed borrowers with a temporary income loss to defer payments for up to two years, with the government providing the lender a guarantee in the event the borrower defaults in repaying the deferred interest.  It expired in April 2011.  The Mortgage Rescue Scheme provided government support for shared equity and right to rent programs, and the Support for Mortgage Interest program subsidizes interest payments for homeowners receiving income support benefits.

In 2009 there were about one million completed foreclosure sales in the US (out of about 60 million mortgages outstanding.)  In the UK there were 54,000 (out of about 15 million mortgages.)

Fannie Mae Pushing Foreclosures

Story in the Detroit Free Press today here, and my commentary at Consumer Law & Policy here.

Fed to Wells: $7000 for Wrongful Foreclosure

Yesterday the Fed announced a settlement with Wells Fargo of claims that its subprime unit had 1) deliberately steered prime borrowers into higher-cost subprime mortgage refinancings and 2) falsified income documents to put subprime borrowers into unaffordable loans.  The settlement provides for an $85 million fine, plus an elaborate claims-based compensation procedure for victims, who may number 10,000 or more.  Notably, families who lost their home in foreclosure as a consequence of Wells Fargo's illegal steering are to receive $7,000 for the loss of their home.  That should cover some moving costs and a month's rent or so.   As far as I could tell the agreement does not provide for consumers to release claims in exchange for these paltry sums, but advocates would be well advised to review settlement notices with affected consumers carefully.

The Fed announcement touts this wrist-slap settlement as the largest consumer protection enforcement fine in its history.   Ample evidence that consumer protection against financial institutions needs to be transferred to a real enforcement agency at the earliest.

Too Big to Comply

Treasury released a detailed  report for the HAMP mortgage modification program today, for the first time rating the major banks and servicers on a variety of metrics.  Worst in three of four categories was BankofAmerica.  BofA, along with Wells Fargo and Chase, will have payments from Treasury suspended until their compliance under the HAMP contracts improves.  The report provides a trove of statistical confirmation of what homeowners, counselors and legal aid lawyers around the US are experiencing - temporary agreements that never become permanent, servicers losing and misrecording borrower information, and not communicating effectively with homeowners about applications and decisions. 

Apart from the failures of the big three banks, HAMP is improving in some ways, but still not reaching enough homeowners.  Only 30,000 HAMP modifications are being added each month, while new foreclosure starts hover around the 150,000 to 200,000 per month level.  The number of temporary modifications in limbo past the 3-month program limit before becoming permanent is way down, except at the big three banks, which now account for half of all temporary mods passing their six month mark.  Last month's report also showed that reperformance is improved:  even after 12 months fewer than 20% of HAMP modified mortgages were back in default, a far cry from the 60% to 70% failure rates of the industry modifications done in 2007 and 2008. 

The retooling of BofA's servicing shop so far does not appear to have produced much improvement.  With the housing market in a double-dip, and foreclosures stubbornly refusing to abate, it may be time for Treasury to face up to the deleterious consequences of the massive concentration in the mortgage industry. 

It will also be interesting to see what steps, if any, our nationalized-but-still-imagining-themselves-as-private GSE's might take.  Treasury's sanctions don't cover the GSE loans that are being maladministered by the big banks.  Will Fannie and Freddie follow Treasury's lead?

IMF Structural Adjustment for US - Write Down Mortgages

I have argued for some time that deleveraging U.S. homeowners, who still carry more than $10 trillion in mortgage debt, is not only a social imperative but essential for the economic recovery.  According to the IMF in its latest semiannual report, failure to deleverage American borrowers is a continuing threat to global economic stability.  The Washington consensus is now fractured, apparently, with the IMF and economists on one side and the banks bleating on the other, with Treasury dithering in ambivalence.

Meanwhile, in vaguely related news, S&P, in a bid to restore its credibility after the massive reclassification of AAA mortgage-backed securities to junk, now takes a flyer into the budget debate and announces US Treasury debt's AAA rating is under review.  Really S&P?  Where would you then suggest SWF's park their excess capital instead?  Fannie and Freddie issues, perhaps.

ACLU Suit to Bar Florida Foreclosure Rocket Docket

My post on yesterday's ACLU petition for a writ of prohibition is at Consumer Law & Policy here.

Foreclosures = Affordability Problem?

Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with.  The data realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? 

As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes.  The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000.   Only 11% of applicants have incomes below $2,000 per month, in poverty-level range.

OCC Findings: Illegal Foreclosures, Critical Deficiencies

At today's Senate Banking Committee hearing on Dodd-Frank implementation, Comptroller John Walsh's testimony gave a preview of some findings from the federal agencies' investigation of mortgage servicing and the robosigning scandal:

"In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole."

More specifically, federal examiners looked at 2800 foreclosure files, and found "a small number" of plainly illegal, completed foreclosure sales, that violated a bankruptcy stay, the Servicemembers Civil Relief Act, or a temporary modification agreement.  The Wall Street Journal reports that the OCC plans to impose fines; the affected homeowners are probably hoping for more remedial measures.  In the meantime, the state attorneys general investigation is proceeding.  It will be interesting to see whether in the post-Dodd/Frank era, the OCC is more willing to play nice with the state AGs.